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Saturday, January 30, 2010

POLITICAL INTERGRITY NOW: Warren Buffett on the Business and Government Connection

Posted by Kevin Price on Jan 29th, 2010


Warren Buffett rolled up his sleeves on the Fox Business Network in a very candid interview with the channel’s Liz Claman, in which he discussed CEOs of failing banks, reconfirming Ben Bernanke, and his Berkshire company.

On the Bank Situation

“You’ll always have banks that are too big to fail. We can’t operate in this world without very big banks…If they are toppling the government will have to do something about it.” This is contrary to conventional wisdom and of this writer. After a year we see that banks had more money than expected (witnessed in the pace in which they paid off their bailouts) and these government programs have done little to increase the pace of loans, since banks have found a way to get “money for nothing.” Why risk their resources if they are washed in capital from Uncle Sam?

Furthermore, these policies have only undermined moral hazard at a time it is so greatly needed. The US cannot be in the business of rewarding bad decision making.”If I were running things if a bank had to go to the government for help, the CEO and his wife would forfeit all their net worth…I think you have to change the incentives. The incentives a few years ago were try and report higher quarterly earnings. It’s nice to have carrots, but you need sticks. The idea that some guy who’s worth $500 million leaves and only has $50 million left is not much of a stick as far as I’m concerned.” This was actually the highlight in the Buffett interview. We need a restoration of moral hazard in banking and that will only come when those responsible for bad decision making suffers for those choices.”The CEO has to be the chief risk officer for a bank.” This is a great observation and a view that needs to be restored. This is best achieved, in my opinion, by letting banks fail. Any executives behind such will find themselves looking for something else to do for a living.

On members of Congress who feel Ben Bernanke should not be reconfirmed:

“They ought to get down on their knees every night and thank the Lord that Bernanke was there through this. He took some unprecedented actions…He took the actions that were necessary to prevent panic from paralyzing this country.” “Unprecedented” often means unconstitutional and has led to the expansion of government like we have never seen in our history, even in the Great Depression. What he has done is created instability in our monetary policy by pumping dollars into the economy at a pace we have never seen. Furthermore, his bailouts of large corporations have undermined the normal functions of a free market economy, such as moral hazard. He has created an economy without risk, which is far from free market in design. What he has done is criminal…two thumbs up for those members of Congress who wish to see him go.

On the future of Berkshire Hathaway’s business acquisition

“We’ll keep buying businesses, as long as I’m alive we’ll keep buying businesses…we’ll try to buy them for cash, sometimes we may have to use some stock, but we’ll use as little stock as possible.” If the US economy continues to reel from the unstable monetary and fiscal policies of the Obama administration, large corporations like Berkshire Hathaway will continue to benefit from them. It should be no wonder that, when questioned about Tim Geithner, he replied “I think he’s terrific.” Maybe for Buffett, but not the rest of the country.

____________________________________________________________________________________________________

Kevin Price is the host of “Price of Business”, M-F at 11 am on CNN 650 and CBS Radio and can be frequently found in the “Strategy Room” at FoxNews.com. A syndicated columnist whose article appear at Reuters, Chicago Sun Times, USA Today, and other media, his BizPlusBlog.com is ranked in the top 1 percent of all blogs by Technorati. His articles also appear regularly at AmericanDailyReview.com and RenewAmerica.com, Examiner.com, and others.

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BUSINESS INSURANCE.COM: Buffett holds option to boost Munich Re stake

Posted On: Jan. 29, 2010 11:14 AM CENTRAL

MUNICH—Warren Buffett’s investment in Munich Reinsurance Co. includes options that could push his stake in the German reinsurer to more than 5%.

Munich Re earlier this week revealed that Mr. Buffett, the billionaire investor who controls Berkshire Hathaway Inc., had increased his direct and indirect stake in Munich Re. In a statement released Thursday, Munich Re said Berkshire’s stake in the reinsurer is 3.084%, which is slightly higher than it previously announced. In addition, Munich Re revealed that Mr. Buffett holds financial instruments granting him the right to purchase another 1.945% in Munich Re and bring its ownership to 5.029%.

The exercise date on those options is March 11, according to Munich Re.

The options add to Berkshire Hathaway’s already significant investment in the reinsurance market. The Omaha, Neb.-based investment vehicle’s various reinsurance holdings, including General Re Corp. and National Indemnity Co., already rank it as the world’s third-largest reinsurer, according to the latest rankings by Business Insurance.

In addition, to its shares and options in Munich Re, the world’s largest reinsurer, Berkshire Hathaway holds a stake in Zurich-based Swiss Reinsurance Co., the second-largest reinsurer, and an option to increase its stake in the company to about 25%.

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Friday, January 29, 2010

TRADINGMARKETS.COM: Easton Lynd to Manage Distressed Properties for Warren Buffet-Owned Berkadia Commercial Mortgage

Posted on: Fri, 29 Jan 2010 12:03:37 EST


SAN ANTONIO, TX -- 01/29/10 -- Easton Lynd Management, the commercial property management division of The Lynd Company, has been tapped by Berkadia Commercial Mortgage LLC to manage a portion of its distressed property portfolio throughout the United States. Berkadia, based out of Horsham, Pennsylvania, is a top-rated, special servicer of commercial real estate loans owned jointly by Warren Buffet's holding company, Berkshire Hathaway Inc. and Leucadia National Corp. Berkadia has a portfolio of $240 million, making it the third largest servicer in the United States. Easton Lynd has more than 30 years managing commercial properties with 9.7 million square feet currently under assignment nationwide.

Easton Lynd's first assignment with Berkadia is a 44,000 square foot stand-alone retail building in Clearwater, Florida, that the loan servicer took back in January 2010. Circuit City had occupied the space prior to its filing bankruptcy and going out of business.

Zac Gruber, regional vice president in charge of Easton Lynd, said a property manager plays a vital role for a loan servicer when it comes to maximizing a property's value.

"Timing is very important in distressed situations," said Gruber. "As a manager, you have to act quickly and be able to identify any issues that are causing the property to lose money. You then have to analyze, prioritize and execute what needs to be done to turn the asset around. It takes a well-trained staff to make this happen."

Gruber continued, "We manage properties like they are our own. Our operations and executive teams come from all areas of commercial real estate, so we are intimately aware of the pressures of real estate investment. We have the clients' best interest in mind 100% of the time."

Gruber said one area in which Easton Lynd brings value is its ability to bring expertise and flexibility to the table when decisions are being made on how to eventually dispose of distressed real estate.

"We provide important feedback that helps steer lenders and servicers in making the right business decision," said Gruber.

Another feature that gives Easton Lynd a distinct competitive edge is its technology platform. The company developed a web-based portal called Easton Lynd Ultranet, which allows owners to view reports, property files, leases, financial statements, insurance binders and results whenever they need access to that information.

"Berkadia ultimately chose us due to our real time technology and transparent reporting," said David Lynd, chief operating officer of The Lynd Company. "In times like these, no one wants surprises. We look forward to continuing our third party management presence in the commercial space in the coming year."

Easton Lynd expects Berkadia and other commercial lenders will have a wave of real estate takeovers to fill the pipeline in 2010. Gruber expects commercial loan defaults to increase and believes his company is well positioned to manage these assets.

"We have been highly successful in leveraging technology, expertise and strong customer service to add value to real estate investments for more than 30 years," said Gruber. "We look forward to doing that with Berkadia and any other entity that needs help managing troubled real estate assets anywhere in the country."

About Easton Lynd Management:

Easton Lynd Management, a division of San Antonio, Texas-based The Lynd Company, is one of the country's fastest growing and most advanced commercial real estate management companies. The firm represents a diverse investor base from small private investors to large institutional clients across multiple property types including industrial, office and retail. Its revolutionary property reporting and tenant interaction capabilities make Easton Lynd a preferred property management firm. For more information log on to www.thelyndco.com.

About Berkadia Commercial Mortgage:

Berkadia Commercial Mortgage LLC, owned jointly by Berkshire Hathaway and Leucadia National Cororation is a highly rated special, master and primary servicer of managing a portfolio of more than $240 billion. As a correspondent for insurance companies and a leading approved lender for Fannie Mae, Freddie Mac, HUD/FHA, Berkadia offers client access to capital sources for acquisition construction, rehabilitation or refinance of commercial real estate properties. For more information www.berkadia.com

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ABC NEWS VIDEO: Warren Buffett on Taxing Bonuses

Warren Buffett on Taxing Bonuses

Billionaire investor says restricting banker bonuses only benefits shareholders.

In an interview with ABC News at a special investors conference in his hometown of Omaha, Neb., Buffett said it was unnecessary to go after banks that had already repaid the loans they had received through TARP. The country's largest banks, including Bank of America, Citigroup, JPMorgan Chase and Goldman Sachs, have all repaid their TARP funds.

"I don't think it makes sense … The banks are not going to be the cause of big losses in the TARP program, maybe the auto companies will," Buffet said."It's a separate situation."


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Thursday, January 28, 2010

WALL STREET JOURNAL: Munich Re: Buffett Voting Rights Potentially Over 5%



By Ulrike Dauer
Of DOW JONES NEWSWIRES

FRANKFURT (Dow Jones)--Munich Re AG (MUV2.XE) Thursday said billionaire investor Warren Buffett owned financial instruments as of Jan. 19 that could lift his voting rights in the company to 5.029%.

Munich Re said in a regulatory filing that Buffett, the chairman of investment company Berkshire Hathaway Inc. (BRKA, BRKB), said "he directly or indirectly held financial instruments that granted him the right to subscribe to shares in our company" carrying 1.945% of voting rights.

Buffett already held 3.084% in the company on that day, Munich Re said. The exercise date of the financial instruments is March 11.

Financial instruments that Buffett held directly were through Berkshire Hathaway Inc., OBH Inc. and National Indemnity Company, which are controlled by Buffett, Munich Re said.

A Munich Re spokeswoman said the company is "pleased about every investor, that's a confirmation of our sustainable strategy." She declined to comment further on the type of financial instruments and whether they will have to be exercised on March 11.

According to the figures, Buffett was Munich Re's largest investor on Jan. 19, ahead of Blackrock Inc. (BLK), which reported in December that it held 4.58% in the company.

On Tuesday, Munich Re, one of the world's largest reinsurers, said Buffett's stake had gone above the 3% threshold on Jan. 18 to stand at 3.045%.

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CNBC: Berkshire Hathaway Won't Issue More Shares In Response to S&P Addition - Stock at 14-Month High

Published: Thursday, 28 Jan 2010 | 3:14 PM ET

By: Alex Crippen
Executive Producer

Warren Buffett's Berkshire Hathaway says today it will not issue more shares in response to the company's just-announced addition to the benchmark S&P 500.

In a news release this afternoon (Thursday), Berkshire says the S&P news prompted "several inquiries" on whether the company "would be issuing additional shares of its common stock in what is often referred to as an 'Index Add' issuance."

The response: "Berkshire does not intend to issue any additional shares of its common stock other than the common stock it will issue upon the completion of the previously announced acquisition of BNSF."

That's a positive for the stock, because the big S&P index funds will have to buy the stock when it is formally added, but there won't be any additional supply to accomodate that demand.








UPDATE: Berkshire B shares closed today at $73.90, a gain of $2.54, or 3.56 percent, from Wednesday's 4p ET close. That builds on yesterday's gain of almost 5 percent following the S&P announcement, and puts the stock at a fresh 14-month closing high, topping last Thursday's $72.72. That was the day Berkshire's 50-for-1 split of its B shares went into effect.







Current Berkshire stock prices:

Class A: [BRK.A 114600.00 3600.00 (+3.24%) ]

Class B: [BRK.B 76.43 2.68 (+3.63%) ]


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BUSINESSWEEK: Buffett May Boost Holding in Munich Re to More Than 5 Percent

By Oliver Suess

January 28, 2010, 04:55 AM EST

Jan. 28 (Bloomberg) -- Munich Re, the world’s biggest reinsurer, said Warren Buffett owns the rights to shares that would bring his stake in the company to more than 5 percent.

Buffett held “financial instruments that granted him the right to subscribe to shares in our company which bear 1.945 percent of the voting rights” as of Jan. 19, the reinsurer said in an e-mailed statement today. Buffett also “held directly or indirectly 3.084 percent” of Munich Re’s voting rights and “therefore by way of aggregation he would have 5.029 percent of the voting rights,” the company said.

Buffett, whose Berkshire Hathaway Inc. owns the world’s third-biggest reinsurer, would become the German company’s largest shareholder if he were to subscribe to the shares. Asset manager BlackRock Inc. held 4.58 percent of Munich Re as of Dec. 1.

Stakeholders in German companies must declare purchases or sales that bring their investments above or below certain thresholds. Buffett’s stake exceeded the 3 percent threshold on Jan. 18, the Munich-based reinsurer said in a statement distributed by the DGAP newswire on Jan. 26. The exercise date of the financial instruments is March 11, Munich Re said today.

Munich Re spokeswoman Johanna Weber reiterated earlier comments, saying the company “welcomes any investor.”

The German reinsurer rose 1.35 euros, or 1.2 percent, to 111.20 euros in Frankfurt, bringing this week’s gain to 1.6 percent. That compares with a 0.9 percent advance in the 29-member Bloomberg Europe 500 Insurance Index this week.


--With assistance Mike Gavin in Frankfurt and Mariajose Vera in Munich. Editors: James Amott, Ben Vickers

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BUSINESSWEEK: Cheapest Route to Walmart From China May Skip Buffett’s Railway

January 27, 2010, 10:17 PM EST

By Kyunghee Park and Eric Sabo

Jan. 28 (Bloomberg) -- Chinese toys and sneakers headed to Wal-Mart Stores Inc. and Target Corp. on the U.S. East Coast may bypass Warren Buffett’s $33.8 billion railway as the expansion of the Panama Canal slashes the cost of shipping them by sea.

The deeper, wider canal will allow A.P. Moeller-Maersk A/S, China Ocean Shipping Group Co. and other lines to ship more cargo directly to New York and Boston instead of unloading it on the West Coast for trains and trucks to finish the journey east. That could save exporters 30 percent, the canal operator said.

The $5.25 billion Panama Canal project, scheduled for completion during its centennial in 2014, may take business from ports including Los Angeles and Seattle, and railroads including Berkshire Hathaway Inc.’s Burlington Northern Santa Fe Corp. It costs as much as $1,000 more per cargo container to use trains than ships, said Lee Sokje, a shipbuilding analyst at Mirae Asset Securities Co. in Seoul.

“It is inevitable that railways, such as Burlington Northern, will lose some of their cargo once the Panama Canal is expanded,” said Jee Heon Seok, a shipping analyst for NH Investment & Securities Co. in Seoul. “Many more containers can be moved in a single voyage on a ship than going through the West Coast ports.”

More Cargo

China, poised to overtake Japan this year as the world’s second-biggest economy, may boost exports by 20 percent during the first quarter as the global economy recovers, according to Macquarie Securities Ltd. and Royal Bank of Scotland Group Plc.

China Cosco Holdings Co., Asia’s biggest shipping company by market value, and 14 other container lines said Jan. 14 they expect a “significant” increase in transpacific cargo this year on rising U.S. consumer sentiment.

That prospective growth spurred Berkshire to pay $26 billion for the remaining 77.4 percent of Fort Worth, Texas- based Burlington Northern it didn’t already own. Buffett, the Berkshire chairman, said the largest U.S. railroad will benefit from “moving around more and more goods.” The acquisition is pending and expected to be completed by March 31.

Burlington Northern customers in Gulf of Mexico ports -- including Houston and Galveston, Texas -- may benefit from more traffic going through a wider canal.

Buffett didn’t respond to a request for comment. A Burlington Northern spokeswoman, Suann Lundsberg, said trains deliver cargo from the West Coast to the East Coast as many as nine days faster than ships using the canal.

30 Percent Savings

Rail traffic is expected to continue growing, although probably at a slower rate than in the past, Lundsberg said.

“We know he doesn’t make short-term investments,” Art Wong, spokesman for the port in Long Beach, California, said of Buffett. “He must be making it because he thinks it’s a great long-term investment.”

About 43 percent of Asian cargo shipped to East Coast ports -- including Savannah, Georgia, and Jacksonville, Florida --goes through the Panama Canal, said Rodolfo Sabonge, director of marketing for the Panama Canal Authority. That share may increase to 49 percent by 2025.

“It will become less expensive overall to ship through the canal,” Sabonge said. “Savings could go up to 30 percent.”

The expansion project, started in 2007, is building locks on both sides of the 50-mile canal, digging a new channel linking the locks and deepening the waterway connecting the Pacific Ocean with the Caribbean Sea.

New York Harbor

Currently, ships loading fewer than 5,000 20-foot boxes use the canal. The expansion will accommodate vessels carrying about 12,600 containers and may generate cargo growth of about 5 percent a year, Sabonge said.

“It will, of course, help reduce costs for exporters to the U.S.,” said Victor Fung, chairman of outsourcer Li & Fung Ltd., the world’s biggest supplier of toys, clothes and furniture to retailers including Walmart, Target, Macy’s Inc. and Marks & Spencer Group Plc.

The company reported HK$46.3 billion ($5.96 billion) in sales during the first half of last year, with 61 percent of that coming from the U.S.

East Coast ports are readying for the changes. The Port Authority of New York and New Jersey is deepening more channels to 50 feet and considering options for a 78-year-old bridge between New Jersey and New York City that may be too low.

“Increasing numbers of big ships are anticipated at our port facilities following an expansion of the Panama Canal,” the agency said in September.

Ports, Railroads Collaborate

Hanjin Shipping Co., South Korea’s largest shipping company that operates two California terminals, is building its first East Coast terminal in Jacksonville to handle an increase in cargo through the canal. The facility opens in 2013.

The ports around Charleston, South Carolina, are dredging to accommodate vessels carrying more than 8,000 20-foot containers.

Six ports on the opposite coast -- Los Angeles; Long Beach; Oakland, California; Seattle; Tacoma, Washington; and Portland, Oregon -- handle about 70 percent of containerized trade between Asia and the U.S., according to an Oct. 12 statement.

They are collaborating with Burlington Northern and Union Pacific Corp. to convince Asian exporters they are better options than the canal for reaching East Coast markets. They cite advantages including deep-water terminals, connections to inland transportation networks, and storage and distribution facilities.

Trains also use less fuel, reducing costs and carbon emissions, they said.

“We don’t think those alternative gateways will go away,” said Tay Yoshitani, chief executive officer for the Port of Seattle. “If we don’t improve our competitiveness, we could lose a lot of cargo.”


--With assistance from Craig Trudell and Erik Holm in New York and Frank Longid in Hong Kong. Editors: Michael Tighe, Bret Okeson.

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MSN INDIA: What American billionaires do for media hype? Visit space!

By Katie Evans, Forbes , 27/01/2010

Doctors couldn't explain this 16-year-old's bizarre neurological and psychiatric symptoms.

There's no escaping him. Donald Trump is everywhere - and he loves it that way. In New York City there are at least 13 buildings with the Trump name on them and at least 20 more around the world.

For nearly a decade Trump has had his own reality television shows, The Apprentice and Celebrity Apprentice, where he showcases his flare for bravado, brashness and product placement. Then there is Cirque du Soleil cofounder Guy Laliberte who took his need for attention to new heights this year by flying into space. The former fire-breather flew with a slew of Russian astronauts in October for a two-week visit to the International Space Station. The cost for his mission: $30 million.

Donald Trump's stamped Trump on everything from water and vodka to suits and online business courses, and he's paid a nice royalty anytime something with his face flies off the shelves.
Then there's the television commentary he provides (for free, to anyone who will listen) every time a big celebrity story hits the airwaves.

Miss USA runner-up Carrie Prejean says she doesn't believe in same-sex marriage? Trump: "It was a controversial question. It was a tough question. If her beauty wasn't so great, nobody really would have cared."

Trump is one of 11 billionaires Forbes selected for their list of the most overexposed billionaires, which recognizes 10-figure tycoons for their appetite for frequent media appearances and endless self-promotion. Their combined net worth: $75 billion.

Broadcast from Space

Guy Laliberte's highly publicized trip, which included a live broadcast to a U2 concert, was used to raise awareness for Laliberte's clean water charity, the One Drop Foundation.

Another billionaire using space to keep his name in the world's headlines is Richard Branson. The chief of Virgin Group unveiled Virgin Galactic's SpaceShip Two in December and plans to use the vessel to pioneer commercial space travel. The rocket ship will launch test runs this year and offer commercial space tours as early as 2012. Tickets are $200,000.

Branson's career has been loaded with media hype. He crossed the Atlantic in a red, Virgin-branded hot air balloon, broke records in a similar-themed speedboat and launched a short-lived realty TV show: The Rebel Billionaire.

World's richest most exposed

Investor Warren Buffett is the world's richest overexposed billionaire. The Berkshire Hathaway maven, who often appears on CNBC in interviews with Becky Quick to offer up his views on the economy and investments, was worth $40 billion when we published our list of the 400 richest Americans in September.

This fall Buffett made "an all-in wager on the U.S. economy" through the purchase of Burlington Northern Santa Fe Railway and has recently been in the middle of Kraft's purchase of Cadbury. Buffett leveraged his 9% stake in Kraft to assert his disapproval of the stock-heavy structure of the original bid and told CNBC's Quick he would have voted against the final deal that closed Tuesday.

The Oracle of Omaha also stars in a new on-line cartoon series that teaches children about finance.
Dallas Cowboys owner Jerry Jones clinched a spot on the list for milking every opportunity to promote the opening of the new $1.2 billion Cowboys Stadium in September. In addition to scores of interviews for sports news outlets and the Forbes.com Video Network, Jones also made a CNBC commercial on the stadium, declaring, "I am American business."

Before the Cowboys' playoff loss Jones hosted a high-profile college basketball game in the new venue and is now planning for a boxing match.

He also allowed Michael Irvin to award the winner of the former wide receiver's reality TV series 4th and Long a spot on the Cowboys practice team, and made a few appearances on the show. This came a year after he was the star of his own HBO reality series, Hard Knocks.

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WALL STREET JOURNAL: Warren Buffett and the S&P: What it Means

By Matt Phillips

January 27, 2010, 7:56 AM ET

Baby Berkshires are getting bid up in premarket trading, after Tuesday’s announcement that the class B shares in Warren Buffett’s iconic company will replace shares of Burlington Northern Santa Fe in the S&P 500 stock index. The Journal’s Scott Patterson reports:

Berkshire’s addition to the index means fund managers who track it will need to rush to buy shares. Many index funds controlled by money managers, such as Vanguard Group, are benchmarked to holdings in the S&P 500, a broad gauge of corporate America. S&P estimates that more than $3.5 trillion in assets are held in investment funds, including index funds, tied to components of the S&P 500.

Previously, Berkshire Hathaway shares had been excluded from the S&P 500 because their high prices cut down on how often they were traded. But that changed when shareholders approved a 50-1 stock split of its Class B shares last week as part of Berkshire’s deal to buy railroad Burlington Northern Santa Fe Corp. last year, likely making the shares more liquid. Berkshire will replace Burlington Northern in the index, as well as in the S&P 100 index. As far as a hard date for the actual addition, that’s yet to be announced.


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INVESTOPEDIA: Wells Fargo Delivers

Posted: Jan 27, 2010 06:59 AM by Sham Gad

Tickers in this Article: USB, GS, C, BAC, WFC

Not all banks are created equal, and Wells Fargo (NYSE: WFC), one of the most well-run banks in the country, is proof positive. Like fellow competitors Bank of America (NYSE: BAC) and US Bancorp (NYSE: USB) demonstrated, all U.S. banks were not spared the wrath of the real estate and credit markets when they came crashing down.

Managing Risk Management
Yet Wells Fargo has managed to prosper while most have faltered. For the full-year 2009, Wells Fargo earned record net income of $12.3 billion on record revenue of $89 billion. If that wasn't enough, the company's pre-tax pre-provision profit, defined as total revenues minus non-interest expense, was a staggering $39.7 billion. To put this figure in perspective, it was more than twice the amount of net charge-offs. Wells Fargo's numbers are all the more impressive when you consider that both Bank of America and Citigroup (NYSE: C) still continue to report staggering losses. (For related reading, check out 3 Secrets Of Successful Companies.)

An Immensely Profitable Institution
On an earnings per share basis, Wells Fargo earned $1.76 for the 2009 year. Unlike other major banks, Wells Fargo and Goldman Sachs (NYSE: GS) actually did not need the infusion of TARP money. Consider this EPS figure when Wells Fargo was trading for under $10 a share last year. On a going-forward basis, investors could have bought one of the best banks in the country, endorsed by no less than Warren Buffett, for less than four times forward earnings.

Still Working
While Wells Fargo has clearly demonstrated its superiority among many other financial institutions, the U.S. is a far cry away from a normal credit and real estate market. All that means is a continued environment where Wells Fargo will outshine the rest. In banking, management is everything, and Wells Fargo has excellent management that knows how to manage risk. Today and tomorrow, Wells Fargo will solidify its position as the standard of banking excellence.

For more, check out The Evolution Of Banking.

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga


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BARRONS: Berkshire Stock Surges After Joining S&P 500

WEDNESDAY, JANUARY 27, 2010

Will gains stick after index-funds finish buying?

BERKSHIRE HATHAWAY'S CLASS B SHARES have gotten a boost, rising 5 points, or 7%, this morning to 73 after Standard & Poor's announced late yesterday that it will be finally adding the stock to the S&P 500 index.

Since the news, Wall Street firms have been trying to estimate the amount of Berkshire stock that will need to be purchased by index funds that seek to track the index. There appears to be some debate about the matter, with estimates ranging from 110 to 160 million of Berkshire's class B shares (ticker: BRKB), which are the ones that will be added to the S&P index. Berkshire's better-known class A shares (ticker: BRKA), now trading at $109,575, up $7,824, are also up 7% today.

Whatever the total amount of index buying, it's a lot relative to the recent volume in Berkshire's class B shares. That accounts for the sharp rise in Berkshire stock this morning. Ultimately, the big question is whether Berkshire shares hold gains following the closing of its purchase of railroad operator Burlington Northern, expected around Feb. 11.

Since the 50-for-one split last week, Berkshire's class B shares have traded more than five million shares a day. That's up from the equivalent of one to two million shares prior to the split. S&P had long kept out Berkshire from the S&P because of its low liquidity and concerns that index buying would drive up the share price if Berkshire were added to the index. S&P's index committee chairman, David Blitzer, said yesterday that with the stock split and higher Berkshire trading volume, liquidity isn't an issue.

Still, indexers will have to buy a lot of Berkshire stock relative to its recent, elevated trading volume in the next two weeks. S&P didn't set a specific date for the addition of Berkshire to the index, but it's likely to occur around the time that the $34 billion Burlington deal closes.

S&P weights companies in the S&P 500 by their public float. That means that Berkshire's weight will be about 67% of its total outstanding shares, or about 1.05 million class A shares, or 1.6 billion class B shares. That will be about 1.1% of the S&P index. Berkshire has about 1.55 million class A shares outstanding (when the class B stock is converted on an equivalent basis). Each class A share equates to 1,500 B shares. Public float is less than the total Berkshire shares outstanding largely because of CEO Warren Buffett's sizable holdings.

If indexers own about 10% of the S&P 500, they would need to buy an estimated 160 million Berkshire B shares, which is about $11.6 billion of stock. However, that buying may be offset by Berkshire stock that indexers will receive for their Burlington shares. Indexers may receive 15 million to 20 million Berkshire shares as consideration in the merger.

Berkshire is using a 60%/40 mix of cash and stock. Burlington has about 340 million outstanding shares. Any Berkshire stock received for Burlington would reduce the amount that indexers need to buy. Burlington will leave the S&P when Berkshire is added.

A mild offset to the index buying in the coming days could be selling by arbitragers who hold Burlington stock. The pricing period for the Berkshire stock is due to start today and continue for the next 10 trading days.

The index addition is good news for Berkshire holders because it likely will mean that the company will issue less stock to Burlington holders than it appeared when the deal was announced in late October. Berkshire's class A shares then traded around $100,000.

Buffett suggested recently in an interview with Bloomberg that Berkshire shares were undervalued and that he wasn't crazy about using stock in the Burlington deal but had little choice in order to get the deal done.

Berkshire's fans also think the stock is attractive, now trading for about 1.3 times our estimate of Berkshire's year-end book value of $84,000 a share.

Berkshire stock could continue to trade higher in the next two weeks ahead of the Burlington closing. The big issue is whether the gains stick after the index buying ends. Berkshire might stay strong because active money managers, who own little Berkshire, will have greater incentive to own it or risk trailing the S&P 500 if Berkshire stock does well. Active managers may decide that Berkshire's attractive business mix, substantial earnings power and strong balance sheet are too good to ignore. There is little analyst coverage of Berkshire, whose ownership is dominated by individuals.

The index buying of Berkshire could depress the S&P 500 index around the time it is officially added to the index because indexers will have to sell the other 499 stocks in the index to make room for Berkshire. The index selling could total $8 billion or so.

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SEEKING ALPHA: Wells Fargo Q4 Review: It Ain't Pretty

January 27, 2010 | about: WFC

Reggie Middleton picture
Reggie Middleton

I have decided to release a significant amount of opinion on Wells (WFC) to the public, and have created an extended version of the report for subscribers with geo-specific charge-off estimates stemming from the FDIC/NY Fed model that we have created in house. A rather comprehensive piece of work. It appears that much of the sell side community is much, much more optimistic on the prospect of Wells than I am. It must be the Warren Buffett investment...

In short:

Total revenues of Wells Fargo in 4Q09 increased 1.0% primarily coming from increased non interest income from mortgage banking and realized gains on debt securities as well as other trading activities. The interest income was down 2.0% (q-o-q) owing to reduced interest earning assets. Loans declined nearly 2.1% or $17.1 billion and the securities AFS (primarily MBS) declined 6.0% or $11.1 billion. The interest expense declined by 4.0% offsetting some of the decline in interest income. Net interest income declined 1.6% to $11.5 billion in 4Q09 from $11.7 billion in 3Q09. Non interest income increased 3.8% to $11.2 billion in 4Q09 from $10.8 billion in 3Q09 primarily owing to increase in mortgage banking income, net gains on debt securities and net gains on trading activities by $344 million, $244 million and $150 million, respectively. Mortgage banking income increased largely due to changes in the fair value of MSR (Mortgage Servicing Rights - a level 3 derivative with valuation derived by management opinion from non-market inputs). Thus, the increase in non interest income was largely driven by trading gains and changes in fair value due to changes in assumptions in valuation models.

Provision for loan losses declined to $5.9 billion in 4Q09 from $6.1 billion in 3Q09 while the total net charge-offs increased to $5.4 billion in 4Q09 from $5.1 billion in 3Q09. The increase in charge-offs primarily came from commercial real estate while the charge-offs of the residential mortgage increased marginally. All readers are welcome to download my CRE 2010 Overview in order to see where this is going. The nonperforming assets increased from $23.4 billion in 3Q09 to $27.6 billion in 4Q09 with non accrual loans increasing from $20.9 billion to $24.4 billion. The increase primarily came from a) residential mortgage where non accrual loans increased $2.2 billion and b) commercial mortgage where non accrual loans increased $1.4 billion. While the NPAs increased substantially in 4Q09, the allowance for loan losses increased marginally from $24.5 billion to $25.0 billion.

Non interest expense increased to $12.8 billion in 4Q09 from $11.7 billion in 3Q09 primarily from higher Wachovia merger integration and severance expense and expense on ARS settlement. Net income was down 9.1% to $3.0 billion in 4Q09 from $3.3 billion in 3Q09. WFC charged nearly $2.4 billion in preference dividends in 4Q09 out of which $1.9 billion was deemed the dividend upon redemption of TARP preferred stock. The net income available to common shareholders was $394 million against $2.6 billion in 3Q09.

My Take

The bursting of the massive real estate bubble and associated Asset Securitization Crisis has seriously impaired the US financial system. US banks' profitability and solvency will continue to be threatened until their balance sheets are purged of the loan losses by writing down the portfolio to the realizable value. This value is currently, in our opinion, on a continuous downward trend, contrary to the opinion of many analysts, consultants and pundits. As pointed out in the CRE 2010 Overview and my blog posts as far back as 2007, commercial real estate (CRE) is the next major crisis brewing due to the inability to rollover underwater debt and the signs of the same have started to emerge in the banks' books. This, coupled with continuing losses from the rolling losses across various classes of debt in the residential space and weak consumer lending and associated non-performing assets, underlines the huge risk attached to the sector and undermines any investment proposition.

wfc_q4_charge-offs.jpg

The credit quality of WFC loan portfolio

Credit conditions continue to deteriorate as the delinquency rates continue to climb and the nonperforming assets continue to increase. Total nonaccrual loans increased 17.0% (q-o-q) to $24.4 billion or 3.34% of total loans* at the end of 4Q09 from $20.9 billion (2.8% of total loans*) at the end of 3Q09. Non accrual loans in commercial real estate increased 25.9% (q-o-q) to $7.0 billion in 4Q09 (5.6% of loans*) from $5.6 billion (4.5% of loans*) in 3Q09. The non accrual loans in residential real estate increased 22.2% (q-o-q) to $12.4 billion in 4Q09 (4.2% of loans*) from $10.1 billion (3.4% of loans*) in 3Q09. The increase in non accrual loans in residential mortgage came primarily from in residential first lien with nearly 53% of the total increase in the segment coming from Pick-a-Pay (mainly Option ARM) portfolio acquired from Wachovia. Total non performing assets increased 17.9% (q-o-q) to $27.6 billion (3.78% of total loans*) from $23.4 billion (3.15% of total loans*) at the end of 3Q09.

wfc_q4_allowances.jpg

Loans 90 days or more past due and still accruing increased 13.9% (q-o-q) to $6.8 billion in 4Q09 from $6.0 billion in 3Q09 with q-o-q increase in commercial real estate and residential real estate at 18.5% and 5.0%, respectively.

There are 27 pages of Wells Fargo Q4 opinion and analysis awaiting those who are interested. Subscribers also have access to geographic charge-off analysis.

WFC 4Q09_Review WFC 4Q09_Review 2010-01-26 05:37:52 1.32 Mb

WFC 4Q09_Review- subscriber edition WFC 4Q09_Review- subscriber edition 2010-01-26 05:38:43 1.46 Mb

Morgan Stanley (MS), Goldman Sachs (GS) and Suntrust (STI) are up next, then I will extend my China short thesis (which is paying off handsomely as are the MS and GS shorts) and I will finally released the Central European short thesis - which should be a biggie.

Disclosure: short WFC


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The Snowball: Warren Buffett and the Business of LifeThe Snowball: Warren Buffett and the Business of Life by Alice Schroeder
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The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham
Buy new: $14.95 / Used from: $10.44
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